Is it better for the U.S. if the Yuan goes up or down?

Question

Just want to see if I am understanding this correctly. The chinese yuan is forced artificially low so that they can be more competitive in the manufacturing world markets. This is upsetting the US manufacturers because, well, china just isn't playing fair. BUT, the U.S. has a huge debt to China because they are the biggest purchasers of U.S. debt. Therefore, if the Chinese Yuan does go up in value, does that not mean the U.S. will owe MORE money to China?
So is it more advantagous for the U.S. for the Yuan to go up or down?

Answer 1

Lets say today the yuan is at $0.13 per yuan. If the Chinese manufactures something for lets say 100 yuan, that is $13. In order to make a profit, they have to sell it for more than $13...they may sell it for, say $15. Now lets say the yuan goes to $0.15. Now, that 100 yuan item is costing them the equivalent of $15 instead of $13, and they need to sell it for say $17 to make a profit. Now lets say a U.S. manufacturer can manufacture the same item for $15. At a yuan exchange rate of $0.13, the Chinese competitor is selling the product for what it costs him, and he can't make a profit. When the exchange rate rises to $0.15/yuan, then the Chinese competitor has to raise their price, and he then can make a profit, so its good for him. But the price the U.S. consumer has to pay has just gone from $15 to $17, so its bad for him.

So if the yuan increases, the manufacturers win because Chinese costs in dollars are increasing, and they are better able to compete. But consumers lose because prices are rising. I think the consumers losses more than offset manufacturers gains when the yuan rises, but for some reason, nobody ever seems to mention the effect on consumers when talking about the yuan.

As far as loans go, our loans are denominated in dollars, so the amount we owe doesn't change. However, the dollar moving does affect how many yuan those obligations are worth to China. Say they have $100 in U.S. securities. At $0.13/yuan, that's worth 769 yuan ($100/$0.13 per yuan. But if the exchange rate goes to $0.15/yuan, then those same securities, even though they are still worth $100, are now only worth 666 yuan ($100/$0.15). Since Chinese wealth is measured in yuan, that is a huge loss to them. They figure to lose money if the yuan increases. So why would they let the currency increase? Because the way you keep the currency artificially low is buying dollars. Buying dollars with yuan increases the supply of yuan, thus decreasing the price. That's why they own so much U.S. debt...buying U.S. debt was their mechanism for keeping the yuan artificially low. From years of keeping the currency down, they've accumulated $700 billion or so in U.S. debt. If the U.S. dollar collapses, they are looking at huge losses in terms of yuan. To keep their currency at current levels would mean buying even more dollars, increasing their risk even further if the dollar declined. I'm sure at some point, they want to decrease their holdings of dollars, but they'll do it very carefully and slowly, to try to avoid a sharp drop in the dollar.

Answer 2

First your debt question,
The Chinese buy Debt in US dollars so whether the Yuan is up or down doesn't really matter we owe them the same number of dollars. I know this is over simplified but we're not going for a book in economics here. This would be different if we owned this amount in Yuan. For example, if we owed 100 Yuan that currently cost $1 we own $1. If the value of the Yuan goes up to say 50 Yuan on the dollar, then we now owe $2. (these are completely made up numbers).

To address the first part as to who it is better for. This is debatable and debated often. It is true that American manufactures can not compete with a low Yuan but the American consumer benefits by having lower prices. So when you say does it hurt America the answer is yes and no. Some economist argue that by shedding less efficient jobs to other markets it frees American resources up to do things we can compete at.

Other say we are exporting good jobs overseas and replacing them with service industry jobs.

I don't know which is true, but I am guessing that it lies in the middle somewhere.

Answer 3

US is never going to pay the debt. Making china a part owner of the debt only acts as a small nonaggression assurance.

The value of the dollar is tied to the Yuan. If it was set free (instead of forced) it would seriously castrate the American Economy. Every major American retailer buys from China because the margins are too high. If it costs $1 to make something in the US (price to produce) then it costs like 12 cents to make it in china, and ship it to the US with profits for manufacturer and shipper. Every business from Amway to Zales buys overseas and sells in the US.

If the Yuan goes up, those profits go down, but so does the production orders. Right now the Chinese industrial complex as a whole can out-produce the US. They make everything from Apples to Xerox machines. In a free economy thats more valuable so the worth of the Yuan should go up.

Just as the US has national debt, it also owns other nations debt. If the value of the dollar decreased (as compared to the Yuan) they can pay the debt off faster with currency that is now worth more. It makes it cheaper to pay off, because the debt is not held in Yuan, but in dollars. If the Yuan goes up the value of the debt held goes down.

Answer 4

If the Yuan goes up then technically the united states owes the chinese more money (the yuan higher priced). However, the u.s. dollar increasing in value also adds more jobs, allows better financial investments, increases wealth.

It is more of a perception issue, because the chinese "aren't playing fair."

Answer 5

Let's say the chinese have a trillion of dollars of US debt.

If the Yuan goes up or down it does not change the debt.

The US Debt is issued in Dollars.

If the United States of America wants to be competitive in the manufacturing world markets then they should change their minimum wages from $5.15 USD to $2.15 USD.

The United States of America wants a $6.8185 Yuan (Up from 7.8185)

Answer 6

When Chinese yuan is undervalued it helps in increasing their exports especially to US and this inturn creates balance of payment deficit for the US which is bad for the US currency and it's value.Things will be much different if yuan goes up, in which case the trade deficit of US won't widen with China. This helps.